See yourself sitting in a home of your own soon? How exciting! We see it too.
The only thing standing between you and your dream? The bank.
Because unless you’ve got a cool $450,000 sitting in your savings (and let’s be real that’s probably a conservative estimate), you’ll need to ask for a loan–a.k.a., a mortgage–to make up the difference.
Making yourself mortgage material
We want to see you in that home, so let’s make sure the bank doesn’t rain on our parade and turn you down.
Truth bomb: It’s not just about the size of your deposit.
When you apply for home finance, your lender or bank of choice is going to go over your finances and spending habits (gulp) in exquisite detail. No stone unturned, no place to hide.
What to do? If they’re gonna be watching, show them your best self and set yourself up for a successful home loan application by following our five ‘to-don’ts’.
1. Don’t quit your job, or change it
Most lenders require your employment status to have been steady for a period before they’ll mark you eligible for finance.
A risk assessment is made and as a general rule, longevity is preferred.
Policies and individual situations vary so we’re not saying a change in employer is going to be reason for an immediate knockback. But it’s always good to speak to your financial provider first to check if the outcome will affect your loan application.
2. Don’t spend your deposit
This one is kind of a no-brainer. You want to keep that money to put towards your home deposit anyway, don’t you?
Regardless, keep it in the account. Hold off on that holiday, put the latest iPhone model down, and go easy on the Christmas gifts.
If you do need to dip into it (life happens), make it a priority to replace the funds as soon as you can.
Because FYI – when the bank says they want to see evidence of savings they mean genuine savings. This is funds held in an account in your name for a minimum of three months. A quick $1,000 or two flicked over by your mum 48 hours ago isn’t going to count.
3. Don’t spend more than your means
Be careful throughout each pay cycle and ensure you only spend what you have need.
Don’t overdo it and let your account go into arrears (in the neg). If you do, you’re basically waving a giant red flag at the bank telling them you’re unable to manage your money. If you can’t manage it as is, they’ll have reason to believe that you won’t be able to manage a mortgage repayment.
So keep an eye on those direct debits!
4. Don’t miss a debt repayment
This goes for any debts. Car loans, credit cards, even your Afterpay account.
Missing a single debt repayment will set your home loan application back a month minimum, and even as much as three. More than enough time to miss out on that perfect home you just found.
5. Don’t take on any additional debt
This is a big one. Any increase in debt prior to applying for home finance can have a huge impact, in two ways.
Firstly, it will appear as an additional enquiry on your credit file and can reduce your credit score. Not good.
Secondly, it may reduce your borrowing capacity. Take a look at how much a small credit card and a mid-sized car loan can reduce the amount the bank is willing to lend you:
- A single applicant with no dependents earning $75,000 a year with no personal debt = borrowing capacity of $433,000*.
- A single applicant with no dependents earning $75,000 with a $5,000 credit card limit = borrowing capacity lowered to $406,000*.
- A single applicant with no dependents earning $75,000 a year with a $5,000 credit card limit AND a $25,000 car loan owing = borrowing capacity lowered to $338,480*.
*Based on a 5.14% interest rate with a 5.19% comparison rate over 30 years. Rates correct as of 1 Feb 2023.
See the difference? You’ll want to avoid taking out a new credit card, a car loan , a personal loan , and even an Afterpay purchase. Yes, the bank considers ‘Buy Now, Pay Later’ services debts too. Read this.
Bonnie’s wrap
When you’re in the lead up to or in the process of applying for home finance, you want to live as simply as you can. It’s not a time to be making big moves or spending big money.
Hold the dancing like nobody’s watching until you’re in that new home and the bank’s eyes are on somebody else, okay?
Your homework: It’s not so much what we want you to do but what we DON’T want you to do.
DON’T:
- Spend your savings.
- Spend above your means and put your account in arrears.
- Miss a debt repayment of any kind.
- Take out another debt of any kind.
- Quit or change your job.
It won’t be forever. Think of this time as like studying for a test; head down bum up for a while, with a big A+ to look forward to at the end.
